Understanding Order Book and Market Depth

What Is an Order Book?

An order book is an electronic list of buy and sell orders for a specific asset organized by price level. Buyers’ and sellers' interests are represented via order books. An order book depicts the dynamic connection between buyers and sellers by visualizing a list of outstanding orders for a specific asset in real-time.

The quantity of orders being bid on or offered at each price point, also known as market depth, is listed in an order book. They provide vital trading information, which increases market transparency. Depth and liquidity of the order book play a crucial role in price discovery.

 

How Does an Order Book Work?

Almost every exchange uses order books to list orders for various assets such as equities, bonds, currencies, and even cryptocurrencies such as Bitcoin. Buy and sell information may show at the top and bottom of the screen or on the left and right sides.

An order book is constantly updated in real-time throughout the day, which means they are dynamic and reflect the real-time intent of the market participants.

There are typically four parts to an order book: buy orders, sell orders, price and size.

1. Buy orders contain buyer information, including all bids, the amount they wish to purchase.
2. Sell orders contain seller information, including all offers, the amount they wish to sell.
3. Each price level will show the given quantity of orders (size) that participants are willing to buy or sell the asset.
4. The highest bid and lowest ask prices are found at the top of the book. COVEST order books show the cumulative size of liquidity for each side of the market (buy/sell) up to the top of the book.

The order book helps traders make more informed trading decisions. They can see order imbalances that may provide clues to an asset’s direction in the short term.